North American Morning Briefing: Stock Futures Tick Up After Market Pullback

09/15/2021 | 06:09am
Jared Isaacman

MARKET WRAPS

Watch For:

U.S. Import Prices for August; U.S. Industrial Production & Capacity Utilization for August; EIA Weekly Petroleum Status Report; Canada CPI for August; Cisco Systems Investor Day webcast.

Opening Call:

Stock futures ticked up Wednesday, signaling a tepid rebound for major indexes that have come under renewed pressure on concerns that the pace of the economic recovery is slowing.

Stocks have slipped in September amid worries that markets are ripe for a pullback after marching higher for much of the year. Just as concerns about high valuations are on the rise, investors say the economic rebound likely won't be as fast as they previously expected. The spread of the Delta variant of coronavirus, an economic slowdown in China and supply-chain difficulties have all dampened sentiment.

"We've shifted from worrying about premature tightening [by the Federal Reserve] killing off the recovery in equities to concerns about the strength of the recovery weighing on equities," said Sebastian Mackay, multiasset fund manager at Invesco. Mr. Mackay remains upbeat about the outlook for stocks, but said he has taken out insurance against volatility by buying put options.

Investors will parse data on U.S. industrial production at 9:15 a.m. for clues about the state of the economic recovery. Economists forecast that output rose in August.

Overseas markets were mixed. The Stoxx Europe 600 edged down, led lower by shares of retail, travel and leisure companies. H & M Hennes & Mauritz fell over 3% after the Swedish clothes retailer said sales in its third quarter fell short of analysts' expectations.

Stock indexes in mainland China and Hong Kong fell after data showed growth across a range of Chinese economic indicators pulling back in August. An outbreak of Covid-19 and tighter property regulations hit consumer spending and the housing sector.

The data made the case for China to ease monetary and fiscal policy, said Vincent Chan, a China strategist at Aletheia Capital. The moves could include cutting banks' reserve-requirement ratios, Mr. Chan said, a tweak that would allow banks to step up their lending.

Casino companies Sands China and Galaxy Entertainment dropped 31% and 20%, respectively, following steep falls in some U.S.-listed peers. On Tuesday, the Macau government set expectations for the future of the gambling industry, including increased regulatory scrutiny over casino operations.

Shares in embattled property developer China Evergrande Group shed another 5.1%, a day after it said it had hired financial advisers.

Forex:

Tuesday's slightly weaker (although still-elevated) U.S. inflation figures had little impact on the dollar, which has kept to a tight range, MUFG said.

The figures keep the Federal Reserve on track to announce plans to taper asset purchases later this year, but this is now more likely in November than September. Next week's meeting is unlikely to "fuel any renewed FX volatility" as "any lingering expectations of something meaningful happening" are now gone, said Derek Halpenny, MUFG's head of research for global markets EMEA.

EUR/USD, last up 0.1% at 1.1817, should stay in a narrow range, with the euro supported by solid economic fundamentals but hampered by divergence between Fed policy and that of the European Central Bank, he said.

Federal elections in Germany could create shifts in terms of fiscal policy and monetary policy that "err on the side of probably more accommodation and expansion" and potentially cause the euro to fall, said Michael Hasenstab, chief investment officer for global macro at Franklin Templeton.

"I think that will have implications for the euro," he said. This doesn't only apply to the euro against the dollar and falls may be more pronounced against Scandinavian currencies, Hasenstab said.

He pointed to strong current accounts in Sweden and Norway, as well as good growth and probably tighter policy--the latter has already been signaled in Norway. "So, it's not just about euro-[US] dollar, but really euro-Scandinavia and euro to some of the other currencies that we think is equally interesting," he said.

Bonds:

In the bond market, the yield on 10-year Treasury notes ticked up to 1.280% from 1.276% Tuesday.

Commerzbank is upbeat about the strong performance of eurozone peripheral government bonds, saying it sees promising dynamics as yield spreads continue tightening regardless of market direction.

This has taken the 10-year Italian BTP-German Bund yield spread below the key 100-basis-point level, rates strategists at the German bank say.

The 10-year BTP-Bund spread is trading at 99.4 basis points in early trade, with 10-year Spanish-German spreads at around 64 basis points and 10-year Portuguese-German spreads slightly below 55 basis points, according to Tradeweb.

Commodities:

Oil prices rose, with Hurricane Nicholas adding to disruption for U.S. Gulf of Mexico producers, who hadn't even fully ramped back up following Hurricane Ida. Those hurricanes are among the factors pushing oil higher Wednesday according to OANDA's Jeffrey Halley.

Elsewhere, jumping natural gas prices in Europe may add indirect support for oil, he adds. Those factors come after OPEC raised its demand forecast for 2022 and the IEA on Tuesday slashed its supply forecast for this year--both of which suggest a tightening market.

Gold prices edged lower, but hold on to most of the gains made on Wednesday after U.S. inflation data were weaker than expected. The weaker-than-expected CPI reading offered support to the Federal Reserve's view that inflation will be fleeting, leading investors to bet that the central bank's tapering and rate hikes won't happen imminently.

"The influence of the special effects caused by the pandemic [on inflation] appears to be gradually dwindling," Commerzbank said. The Fed "will not be in any great rush to scale back its bond purchases," the bank said.

Copper prices edged higher, halting two days of declines, driven by concerns about fresh Covid-19 outbreaks in China. Three-month copper on the LME is up 0.6% at $9,492 a metric ton. Prices rallied to a roughly six-week high on Monday but have slumped since.

"Investors are growing concerned about the spreading Delta variant, especially in China, which now seems to have more than its usual share of outbreaks," said Ed Meir, a metals consultant at ED&F Man.

Beijing has locked down the city of Xiamen, a manufacturing hub, Meir said.

Aluminum meanwhile rises 1.4% to $2,873.50 a ton. Data released Wednesday shows China's aluminum output fell for a fourth straight month, amid production restrictions.

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